Five Wall Street investment and hedge funds have the most to lose as China’s Suntech Power Holdings Co. seeks more time to repay $541 million of convertible debt.
Mount Kellett Capital Management LP, Driehaus Capital Management LLC, Pioneer Investment Management Inc., Silverback Asset Management LLC and Susquehanna International Group LLP owned about 32 percent of the debt, according to December public filings compiled by Bloomberg. The Wuxi-based company that was once the world’s biggest solar panel maker said March 11 that more than 60 percent of holders had agreed to extend the repayment date to May 15 from March 15.
Global demand for solar panels has slowed as government support waned, driving prices down 20 percent in 2012 and prompting losses at the Chinese manufacturers that make up the majority of the 17-member Bloomberg Global Large Solar Energy index. Government agencies and China Development Bank Corp. have provided support to at least two struggling solar companies this year, averting the Asian nation’s first onshore bond default.
Investing in Suntech is “a speculative bid that the government will rescue the company,” said Noel Hebert, chief investment officer in Bethlehem, Pennsylvania-based Concannon Wealth Management, which oversees about $250 million and doesn’t own Suntech debt. In a restructuring, bondholders “don’t have much of a chance at recovery,” he added.
Suntech is “working to find a resolution,” Chief Executive Officer David King said in the March 11 statement, which didn’t explain how Suntech will meet the new deadline or why it lacks 100 percent support. The company said yesterday it will stop production at its Goodyear, Arizona, plant in April.
Colin Peterson, who said he is a bondholder through his distressed debt-focused hedge fund Trondheim Capital Partners LP in Scottsdale, Arizona, said he wasn’t aware of the forbearance agreement until it was announced.
“We were a little surprised to see that they pushed back this bond maturity,” he said in an interview. “We’re not aware of any way they can do that.”
The bonds fell 2.4 percent to 30.25 cents on the dollar yesterday, according to Trace, the reporting system of the Financial Industry Regulatory Authority. They rallied from a 12-month low of 25.1 cents on Dec. 6 to 56 on Jan. 9. The American depositary receipts fell 5.2 percent to $1.09 in New York.
The forbearance agreement is still “tantamount to a default” since the notes aren’t being paid as agreed, according to Vicki Bryan, an analyst at Gimme Credit LLC in New York. Bondholders may have few options besides granting the extension given Suntech’s debt load, she said.
Shi Zhengrong, the former chairman, said March 5 the company has no plan in place to pay the debt. Susan Wang, formerly the chief financial officer of the electronics manufacturing company Solectron Corp., replaced Shi last week. Shi founded Suntech in 2001 after earning a doctorate in electrical engineering from Australia’s University of New South Wales and serving as executive director of Pacific Solar Pty. in Sydney. Suntech was the world’s biggest solar-panel company in 2011 with shipments of 2.1 gigawatts.
The company’s market value slumped 60 percent in the past year to $196 million after losses of $646 million in the four quarters through March 2012. The company hasn’t released any financial reports since, after announcing in July that it may have been the victim of fraud involving 560 million euros ($734 million) of German bonds that may have never existed.
Suntech had about $2 billion of debt as of the end of August, according to a bondholder presentation in November filed with the Securities and Exchange Commission.
The company is talking with Wuxi’s government about aid. Wuxi Suntech Power Co., a unit of Suntech Power Holdings Co., may seek bankruptcy protection by March 20 and sell a stake to state-owned Wuxi Guolian Development (Group) Co., the China Business Journal reported, citing a person it didn’t identify.
Mount Kellett owns 12 percent of the bond, according to data compiled by Bloomberg. Daniel Gagnier, a spokesman, declined to comment. Spokesmen for Driehaus, Pioneer, Silverback and Susquehanna didn’t respond to interview requests. It’s not clear at what price the funds bought the debt or whether their holdings have changed this year.
“The Wuxi government may be driven to save some of the local assets owned by Suntech, while they won’t rescue the entire listed company which mainly involves overseas investors,” said Wang Haisheng, a Shanghai-based analyst at Minsheng Securities Co. “The government is more prone to spin off the assets.”
While the location of the debt outside of China reduces bondholders’ claims to onshore assets and limits their leverage, it also attracts publicity to any default, said Charles Yonts, an energy analyst at CLSA Ltd. in Hong Kong.
The most likely scenario is “that convertible bond holders take some sort of haircut,” he said. “I don’t think that Suntech would be a top choice as a potential company to fail, given the high domestic and global profile.”
China may become the largest market for solar panels this year as the global market grows 14 percent to install 34.1 gigawatts, according to analysts surveyed by Bloomberg.
Other Chinese solar companies are getting state aid as air pollution reaches hazardous levels in major cities. LDK Solar Co., the second-biggest maker of wafers, said Jan. 31 that it received approval for a 440 million yuan ($70.8 million) loan from state-owned China Development Bank Corp.
LDK is safer than Suntech after selling stakes and securing loans from China Development Bank, said Lian Rui, a Beijing-based analyst at research company NPD Solarbuzz, adding that its board, investors and government backers are “more united.”
Shanghai Chaori Solar Energy Science & Technology Co. (002506) enlisted China Securities Depository & Clearing to help it make an interest payment to bond investors March 3. Its 1 billion-yuan bond is due in 2017.
No company has defaulted on publicly traded debt in China since the central bank began regulating the market in the late 1990s, according to Moody’s Investors Service. The yield on five-year corporate bonds rated AA- dropped nine basis points this month to 6.29 percent, according to Chinabond. The rate on similar-maturity government notes was little changed at 3.29 percent. The gap between the two yields is 300, the lowest since June 2011.
Confidence in China’s economy is improving. Five-year credit-default swaps protecting sovereign notes against non-payment fell five basis points last month to 64 as of Feb. 28 in New York and was recently at 62, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The yuan gained 0.04 percent to 6.2140 per dollar in Shanghai.
“This could be the first high-profile test case, as other solar companies are also in distress,” said Yang Liu, a convertible bond analyst in Hong Kong at Daiwa Capital Markets Co. “With so many banks involved, with political intention involved, it won’t be a straight-forward default case if it comes to that.”
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